Saturday, May 23, 2009

Inadequate theories in economics - 2

(See also 19th May)Tim Congdon said how many leading academics ignore the pivotal role of banks in our financial system. They see them as passive intermediaries only and not as the key providers of credit that is vital to the maintenance of the good financial health of companies and the wider economy. He said that the followers of New Keynesianism, although having had some success for a while - they are very influential with central banks - have nothing to say about the current financial circumstances and it is in this silence on the banking system that the fault lies. Overall the ideas of this school of economic thought and those of some others received his verdict of ‘tosh’ or ‘junk’.

His view is that the percentage increase in the level of money (that is deposits) that affects the growth of the nation’s gross domestic product. This is key. Money can be called into being out of thin air – we are in a ‘fiat money economy’ - so the solution is in the authorities’ hands. What the UK government has recently started through the Bank of England will bring about the creation of money. It is borrowing from banks and is buying gilts to counter the huge drop in money holdings over the past 18 months. He said that the stock market rise since March reflects the general expectation that new money is on its way and share rights issues are now raising new money to refinance companies. His book: How to stop the recession, was published in January.

It seems that the tide has turned in terms of the understanding of ‘the market’ according to Professor Richard Werner. He quoted President Sarkozy of France and George Osborne (Tory shadow Chancellor) who say they no longer believe that ‘the market’ is efficient or is the ultimate arbiter of everything financial and economic, which was one theme in his book New Paradigm in Macroeconomics (2005). His own view of macroeconomics includes the importance of credit and the quantity of it. His view of bankers is summed up in a quote from Nassim Nicholas Taleb (author: The Black Swan) about the economics establishment: ‘People who were driving a school bus blindfolded (and crashed it) should never be given a new bus’. RW said they surely cannot take care of the economy since they have shown that they cannot take care of themselves. His long experience in Japan through the 1990’s shows him that what that country went through then, is in danger of being repeated by the rest of the world now. He said that quantitative easing will not be a cure-all if all that happens is that bank reserves are boosted. He advocates carefully directed credit allocation into non-speculative, productive ends. This worked very well for some time in Japan, but it went awry when it lacked openness and caused the real estate bubble. Read about it in his book, a best seller in Japan: The Princes of the Yen, published in 2003. Click here for more.

More to report here next week from this second seminar from this increasingly important think-tank centred at Southampton University. Werner goes to core of the problem in the financial and economic system. Posted by Charles Bazlinton author: The Free Lunch – Fairness with Freedom